A Harvard MBA’s radical quest to erase his debt

(Poets&Quants) — When he graduated from the Harvard Business School three years ago this month, the economy was a wreck. Nearly one in four of his classmates didn’t have a job at graduation in May 2009. Yet, Joe Mihalic, then 26, was able to land a job with Dell DELL in Austin, Texas, at twice as much as the $52,000 a year he made before earning his MBA.

But there was some overhang from his experience in Boston: roughly $101,000 in loans that he had to borrow to get the degree, even after Harvard gave him $54,000 in fellowship support.

Mihalic, of course, is hardly alone. The average debt of a Harvard MBA last year was $77,880, up from $73,110 a year earlier. Wharton MBAs, however, racked up average debt loads estimated to be an unprecedented $114,000, and the median financial burden for an MBA from a top-10 business school from the Class of 2011 is about $88,500.

Despite Mihalic’s six-figure burden in the midst of the economic downturn, he gleefully jumped into a free-spending lifestyle that had defined his MBA experience. He bought a 2004 BMW M3 in the same month he graduated from Harvard. From Thursday to Saturday nights, he did the town with pricey dinners and drinks. For his 28th birthday, he barhopped with friends in a black stretch Hummer. Though Mihalic had budgeted $850 a month for entertainment, he was commonly spending $1,300 monthly.

But there was one place where he didn’t slough off. For 21 months straight, he dutifully made the monthly $1,057 payments on his student debt. It wasn’t until last summer, when he checked his balance, was he thrown into shock. After paying out more than $22,000, he still owed $90,717, a sum that exceeded his after-tax salary for a year.

Going the extreme financial diet route

A back-of-the-envelope calculation showed that Mihalic would pay $42,000 in additional interest if the loans went to their natural 10- and 15-year terms. That is when he vowed to go on an extreme financial diet to get rid of the burden. “Student loans are a strange animal,” he reasoned. “Unlike a payment towards a car loan or a mortgage, a student loan payment doesn’t go towards something that is benefitting me in a direct way.”

He vowed to do “everything in my power — short of lying, cheating, and stealing — to pay down this debt in the next 10 months.” Except that in his case, he also decided to chronicle the journey on a blog called No More Harvard Debt. The idea to anonymously write about the sacrifices he was about to make occurred to Mihalic last August after knocking out a cover letter to apply for a weekend delivery job.

Even to him, taking a part-time position to pay down more of his debt seemed like a peculiar thing to do as a Harvard MBA with a six-figure management job at a Fortune 50 company. “I took a step back and it wasn’t until I stopped laughing at myself that I realized others might enjoy laughing at me, too,” he recalls. “The blog started as a joke. I had every intention of following through on my challenge when I started it, but I wanted to let people be amused by it and get a laugh at it, too.”

Over the next seven-and-a-half months, through 88 separate posts, he vividly describes his experience. His blog is, at times, introspective, witty, and sincere, often inspirational. His finances are laid bare, open for all to see as if he were dissecting a frog in a high school lab. From his $20 haircuts to his monthly car insurance of $171, he meticulously details every expense and just about every source of revenue in his life. He writes with humor and flair on what it is like to be a cheap date over a cup of coffee or a hike in the woods.

But what allows Mihalic to maintain this entertaining and often addictive narrative of what he calls “the walk to debt freedom” was his extreme goal. The challenge resulted in sacrifices that few of his classmates could ever endure. He gave up all dinner dates and didn’t go to a single movie. He stopped contributing to his 401k plan, decided against going home for Christmas, and missed his friends’ parties and weddings. When he went to bars with friends, he carried a flask with booze to mix with his purchased Coke KO. He shared a NetFlix nflx account and refused to buy a single article of clothing.

To earn extra money, he sold his second car and a motorcycle, rented his spare bedrooms to strangers through Craiglist, and started a side business doing landscaping work. Quickly, he chipped away at his debt. To start, he liquidated his IRA account for $8,000, sold stock worth $14,000, and used about $3,000 of available cash to wipe out one loan. Within seven months, he managed to make his final payment and rid himself of all his debt in March of this year — three months ahead of his goal.

Leaning on thrifty origins

His fanaticism to quickly toss off the debt albatross has its roots in a relatively modest upbringing, despite the fact that his father is a successful auto executive. “I come from a family that respects the value of money — almost to a fault,” he explained in one post. “While money never appeared to be tight, it never got thrown around, either. My mom bought my clothes at Kohl’s. If I wanted name brand, I had to pay for it myself. My mom spent her Saturday mornings clipping coupons. Every single Saturday evening — without fail, no exaggerations — we went to mass followed by dinner at Olive Garden, Red Lobster, or some similarly priced restaurant.”

One anecdote is especially telling. “My dad is extremely careful with money, and he has gone to lengths to try to instill that value within me,” the Harvard MBA wrote. “It took him two weeks and a couple of trips to K-Mart before he finally bought me a bicycle when I was five. When I outgrew that, he paid for a second bike a few years later. On the car ride home after the second shopping trip, he told me that that would be the last bike he ever paid for.”

After he graduated from the University of Michigan with a degree in business in 2005, he went to work as a supervisor in a factory in Austin. “I decided the bonuses and raises of my blue-collar staff, so I knew how little they made and I saw how many of them were living paycheck to paycheck,” he wrote. “In addition, the factory was constantly under the threat of being outsourced and off-shored. Between these two influences, I never felt fat and happy, and was always watching my back for that tap on the shoulder that signals the beginning of a lay-off.”

Weaning off of the MBA spending culture

He concedes now that a shift in his lifestyle occurred during his two years in the MBA program at Harvard. “At HBS, $100 dinners for one person in downtown Boston are a standard affair,” he says. “Nobody thinks twice about taking an international vacation — they just go. I remember a friend told me she was going with a group of students to Oktoberfest for the weekend. I asked her what bar she was heading to. She laughed at me and told me the bars in Germany — she was going to the actual Oktoberfest — for the weekend!”

His conclusion is obvious, yet filled with truth. “A lot of people in this country — regardless of socioeconomic status — have an unhealthy obsession with things and experiences and statuses. We shop brands; we drop names. We try to keep up with the Joneses. We comfortably tolerate an unhealthy level of debt.”

Each day during his challenge, Mihalic would pore over a spreadsheet that tracked his progress. The negatives, when he went over his budget, were marked in red, and the positives were in green. On March 29, after seven months of discipline and patience, he made his final payment on the debt. Mihalic says he then had to ask his roommates for their rent a few days early so he could meet his mortgage payment three days later.

“I felt good,” he recalls. “I knew that the reward would be worth it. I got misty-eyed looking at the progress I made and all the work that went into it. My heart was beating so hard and I was still in shock that I had done it. On that day I made that payment, I had nothing. But every day I go to work now I’m actually increasing my wealth instead of reducing my debt.”